These 4 Measures Indicate That Applied Materials (NASDAQ:AMAT) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Applied Materials, Inc. (NASDAQ:AMAT) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Applied Materials

What Is Applied Materials's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2024 Applied Materials had US$6.26b of debt, an increase on US$5.56b, over one year. But on the other hand it also has US$9.47b in cash, leading to a US$3.21b net cash position.

How Strong Is Applied Materials' Balance Sheet?

We can see from the most recent balance sheet that Applied Materials had liabilities of US$8.47b falling due within a year, and liabilities of US$6.94b due beyond that. Offsetting this, it had US$9.47b in cash and US$5.23b in receivables that were due within 12 months. So its liabilities total US$703.0m more than the combination of its cash and short-term receivables.

Having regard to Applied Materials' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$133.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Applied Materials also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Applied Materials has increased its EBIT by 2.8% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Applied Materials can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Applied Materials may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Applied Materials recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Applied Materials's liabilities, but we can be reassured by the fact it has has net cash of US$3.21b. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in US$7.5b. So is Applied Materials's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Applied Materials would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.